Tag: economic development

A tale of three cities and three different government programs

The stories of how governments have helped Chobani yoghurt, ESPN and Pfizer are an interesting contrast on how government support can help business.

Three different business; Chobani yoghurt, ESPN and Phizer are an interesting contrast on how government support can help business and get a real return for taxpayers.

When Kraft Foods decided to shut down its South Edmeston yoghurt plant losing the 55 remaining jobs was a blow to the hamlet of 2,000 in upstate New York.

Eight years later the plant is in new hands, employs 600 people and is the centre of  the United States’ thriving Greek yoghurt industry.

In 2006, Hamdi Ulukaya bought the dilapidated factory from Kraft to produce yoghurt similar to what he was used to in his native Turkey and today Chobani is one of the fastest growing food brands in the United States.

Ulukaya tells the story of Chobani in the Harvard Business Review and how the company has grown without any external investment, instead relying on bank finance and government supported guarantees.

Key to Chobani’s founding were the US Small Business Administration loan guarantee program that enable the entrepreneur to buy the mothballed Kraft plant.

While Chobani is a success of the Federal government’s program, just over a hundred miles away the Connecticut state government is pouring money into the maw of ESPN to keep the company’s head office in the town of Bristol, the New York Times reports the company has received nearly quarter of a billion dollars in subsidies in just over a decade.

ESPN has received about $260 million in state tax breaks and credits over the past 12 years, according to a New York Times analysis of public records. That includes $84.7 million in development tax credits because of a film and digital media program, as well as savings of about $15 million a year since the network successfully lobbied the state for a tax code change in 2000.

Notable amongst ESPN’s benefits are the credits under the state’s film and digital media program. As we’ve discussed on this blog in the past, the movie industry plays a cynical game or playing off governments and its no surprise that cable networks would do the same thing.

Connecticut has a bad track record in industry incentives, the destruction of much of the town of New London is a poster child of what governments shouldn’t do when trying to build new industries or attract large corporation.

New London’s demolition of an entire suburban district for the never built head office of pharmaceutical Pfizer is testament to what can go wrong when government officials are dazzled by big promises from large corporations.

Unless support is appliedstrategically and sensibly, competing against other communities to attract big corporations, sporting events or major projects is a zero-sum game that ultimately sees the taxpayer a lose.

While Chobani created 600 jobs in South Edmeston at no net cost to the taxpayer it’s likely Kraft would have demanded tens of millions of dollars in NY State taxpayer support for retain fraction of the jobs that the new business created.

Invariably modest small business programs prove to be a better bet for taxpayers than dumb corporate welfare, unfortunately governments around the world prefer to throw money at big business as they are the ones that write the campaign cheques and employ retired politicians.

Sadly in an era where corporate welfare is the norm rather than the exception, we can expect to see more ESPN type deals and fewer Chobanis with the taxpayer being the poorer for it.

When a politician proudly announces the number of jobs being created through their subsidies to a large corporation, it’s worthwhile for local taxpayers to take the spending of their money with a large grain of salt as history is not on their side.

Image courtesy of jprole through sxc.hu

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Does the motor industry matter in the 21st Century?

Is the automobile industry the driver for 21st Century economic growth?

One of the key drivers of Twentieth Century industrialisation was the motor industry. Today it’s an industry plagued by over production, distorted by government subsidies and increasingly dominated by a small group of major players.

In Australia, the Productivity Commission examined how the motor industry was evolving and its preliminary report (PDF) is a good snapshot of the current state of play in the global automobile sector.

Chronic worldwide overcapacity is what stands out most starkly in the report with most of the world’s manufacturers operating at less than the 80% production break even point that’s assumed in the industry.

global-motor-industry-overcapacity

Australia is a good example of how the motor industry was held as being essential to a country’s development. Like most of the world, the early Twentieth Century saw dozens of small automobile manufacturers pop up in the backyards of enthusiastic tinkerers – it’s like the surge in smartphone apps today.

Eventually only a handful survived the industry shakeout following the Great Depression and by the end of World War II the industry was largely dominated by US, British and European manufacturers, today that consolidation has increased with East Asian producers replacing the UK carmakers.

The lessons of World War II

One of the lessons from World War II was that having a strong domestic manufacturing industry was a nation’s strategic advantage. So governments around the world protected and subsidised their automobile industries along with other factories.

For Australia, bringing in the required labour to run those manufacturing industries was a seen as a key to the nation’s post World War II growth and it was one of the contributors to the country’s ethnic diversity that started to flower in the late 1970s.

Today the echoes of those policies remain with governments around the world still subsidising their motor industries despite the economic and strategic military benefits of automobile manufacturing being dubious at best.

Australia’s failure

In Australia the modest incentives provided by governments hasn’t been enough to keep local car plants operating, which was the reason for the Productivity Commission’s report into the future of the industry.

The report’s message is stark for Australia, as a high cost nation that hasn’t invested in skills or capital equipment there’s little reason for the world to buy Australian technology as there’s little being built that the world wants or needs.

With the nation’s advantages in agriculture and mining – not to mention solar power – Australia should be leading in technologies that exploit these advantages but instead the nation is a net technology importer in all three of those sectors.

To be fair to Australian industrialists, they responded rationally to government policies that favour property and share speculation over productive investment. Coupled with the drive to create duopolies in almost every sector of the Aussie economy, it didn’t make sense to invest when they could exploit domestic markets rather than invest in new technologies.

Becoming high cost economies

For nations moving up the value chain such as China, Thailand and Brazil; Australia’s failure to develop high tech manufacturing and inability in adapting to being a high cost economy is a powerful lesson in the importance of framing sensible long term economic policies.

The Australian Productivity Commission report illustrates how the motor industry does have a role in helping countries move into being industrial powerhouses, but once a nation becomes a high cost economy it takes more than dumb subsidies to maintain a competitive advantage.

Germany and the US illustrate this, and the fact both countries’ motor industries are running at greater than 80% capacity shows how their automotive sectors are evolving. It’s no co-incidence that electric car manufacturer Tesla Motor’s plant in Fremont, California was a former GM-Toyota joint venture factory.

As motor vehicles become increasingly clever so too are their manufacturers; unless car builders and governments are prepared to invest in the brains of their workers and modern technology then they have little future in the 21st Century.

For nations, the question is whether the Twentieth Century model of building a car industry is relevant in this century. It may well be that other industries will drive the successful economies of the next hundred years.

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Britain’s smart cities agenda

Can Britain’s national innovation strategy give the UK leadership in the smart city movement?

Yesterday the UK government held its first Smart Cities Forum on what it sees are the economic opportunities for the British economy and its cities.

The Smart Cities Forum is part of the British government’s innovation policy that’s seen £50 million allocated to smart city projects including £24 million for Glasgow’s Future City showcase.

While the British government sees this as being an investment in grabbing the nation a share of what they believe to be a £400 billion global market, it’s also an opportunity to rejuvenate the county’s cities, as this video clip explaining what being a smart city has to offer Birmingham.

Like Barcelona and San Francisco tech and smart city policies, the UK initiative was born out of the 2008 Global Financial Crisis which forced the British political and business establishment to rethink the nation’s economic position and policies.

A key part of that rethink is how infrastructure spending can be co-ordinated with new technologies and this is something Barcelona is doing with its own smart city project in rolling out fiber networks as part of scheduled maintenance around the town.

The Glasgow pilot project is probably one of the more ambitious smart city projects, as the UK’s Technology Strategy Board says in its media release;

The Glasgow Future Cities Demonstrator aims to address some of the city’s most pressing energy and health needs. For example, developing systems to help tackle fuel poverty and to look at long-standing health issues such as low life expectancy.

Glasgow’s objectives go beyond the usual open data and parking spot strategies and attacking low life expectancy and poverty are strong social challenges.

With buy-in from the national government, the UK is making a strong big to lead the smart city industries. The challenge now is for British businesses to step up and find the commercial opportunities.

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How important is public transport to smart cities?

Public transit systems may be essential to a city’s success in the 21st Century.

One of things that stands out when discussing economic development with city governments is the importance of public transit for towns aspiring to be smart cities.

This was particularly notable in interviewing Gordon Innes, CEO of London and Partners, about British capital’s building upon the legacy of the 2012 Olympics and its quest become the digital capital of Europe.

At the centre of these developments is public transit, something mentioned by both Innes and Laurel Barsotti of the City of San Francisco.

Innes sees public transport as essential to London’s growth, “it’s absolutely critical to the physical growth of the economy.”

“In the run up to the Olympics nine billion was spend in upgrading the tube and Dockland Light Railway and that opened up all of East London’s economy in way because it wasn’t accessible or attractive for businesses.”

“Stratford now is the best connected train station in Europe,” declares Innes. “That part of the city and around the Docklands is much more accessible and that’s bringing in investors. It wouldn’t have happened if the transport infrastructure wasn’t there.”

In San Francisco, Laurel Barsotti sees a much more subtle advantage for the city in having, by US standards, a comprehensive public transit system in its bus, light rail and subway system.

“A lot of the entrepreneurs creating those companies are concerned their employees see people using their products,” says Barsott. “They want them riding the bus to and from work and see people interacting with their products.”

While in Barcelona, the public transport system is forming part of the local Smart City program where bus stops are Wi-Fi base stations and a fundamental part of the town’s communications network.

For cities, it may well be that having decent public transit systems is going to be the competitive difference in being a key part of the 21st Century economy.

Those parts of the world not investing in transport networks may find they are being left behind in the new economy.

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How did San Francisco become the darling of the tech scene?

How did San Francisco become the darling of the tech scene?

Regular visitors to San Francisco would notice how the city has changed in the last few years.

Companies that were setting up in Silicon Valley are now basing themselves downtown, the business community is energised and the seedier parts of the town are looking substantially spruced up.

To understand the change I interviewed Laurel Barsotti from the City and County of San Francisco as part of the Decoding the New Economy series of video clips.

Laurel is the council’s Director of Business Development and we discussed how the local government has worked with the community and business leaders to drive San Francisco’s economic growth.

The shift from Silicon Valley

A striking change in the tech industry is how the startup focus has shifted from Silicon Valley fifty miles away to downtown San Francisco. Laurel puts it down to a shift in the priorities of the sector.

“I think we benefited from a shift in the tech industry, being much more focused on design and user experience,” says Laurel.

“The people who are investing in that are people who want in San Francisco and people who want to live and work in the same city.”

“A lot of the entrepreneurs creating those companies are concerned their employees see people using their products, they want them riding the bus to and from work and see people interacting with their products.”

Changing the tax code

Like Barcelona, the Global Financial Crisis shook the city up, “with the economic downturn our whole city made jobs a top priority.”

Part of that review focused on the disadvantages of basing a business in San Francisco.

“It was bought to our attention that we were the only city in California that taxed stock options.” Laura says, “companies that wanted to go public were having to leave San Francisco to afford it.”

“We did an entire revision to our tax code which showed to investors they could count on San Francisco to be business friendly.”

Regenerating communities

Along with the problem of city taxes, the city was facing the problem of regenerating blighted neighbourhoods and the administration decided to address both problems together by offering incentives for businesses to setup in the mid-market district – I’d been warned not to call it ‘The Tenderloin.’

“We had a neighbourhood that was facing a lot of blight and we had not been able to successfully increase business and we had companies like Twitter telling us that our payroll tax was causing them problems and making it hard for them to grow in San Francisco,” Laura tells.

“So we combined those two problems and made it so a San Francisco company was able to move into a neighbourhood that needed more investment and business and it would be able to save some money while helping us improve the neighbourhood.”

The future for San Francisco

A common point when talking to city leaders and economic development agencies around the world is the focus on building a diverse economy and Laura sees that as part of the future for San Francisco.

In that vision includes manufacturing, biotechnology and tourism along with the internet based industries that are today’s investment and media darlings.

The focus though is on the city’s residents and how life can be improved for everyone, not just the business community and high tech investors.

“We are really focused on creating an economy for all,” says Laura. “We want to remain as diverse as possible.”

“Every San Franciscan, from no matter what socio-economic background, has a place that they can be.”

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Cities of Industry

Governments are beginning to recognise manufacturing is part of any advanced economy, some though are struggling to abandon the last thirty years of ideology.

The latest Decoding The New Economy interview feature Laurel Barsotti, Director of Business Development at the City of San Francisco discussing how the city refound it’s entrepreneurial mojo.

A notable point about Laurel’s interview is how she has similar views to Barcelona’s Deputy Mayor Antoni Vives about the importance of industry to San Francisco.

For some time it was an article of faith in the Anglo-Saxon world that the west had become post-industrial economy where manufacturing was something dispatched to the third world and rich white folk could live well selling each other real estate and managing their neighbours’ investment funds.

“Opening doors for each other” was how a US diplomat described this 1980s vision according to former BBC political correspondent John Cole.

It’s clear now that vision was flawed and now leaders are having to think about where manufacturing, and other industries, sit in their economic plans.

Barcelona’s and San Francisco’s governments have understood this, but others are struggling to realise this is even a problem as they hang on to dreams of running their economies on tourism, finance and flogging their decidedly ordinary college courses to foreign students.

For some political and business leaders this is a challenge to their fundamental economic beliefs. It’s going to be interesting to see how they fare in the next twenty years.

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Measuring an industrial hub’s success

What should measure the success of technology incubators and hubs? London’s Google Campus gives us some clues.What should measure the success of technology incubators and hubs?

A short article appeared on London’s City AM website yesterday discussing the successes of Google’s Campus and the government’s Tech City initiative.

What jumped out of that story is the quote from Benjamin Southworth, the former deputy chief of the Tech City Investment Organistion, that London’s first tech IPO is “probably 18 to 24 months away”

Southworth’s comments raise the question of how do you measure the success of initiatives like Tech City, does a stockmarket float indicate success of business or tech cluster?

The debacle of Australia’s Freelancer float which saw the shares soar over 400% on the first day of trading certainly doesn’t indicate anything promising about the startup scene down under apart from the opportunities for those well connected with insiders on Australian Security Exchange traded stocks.

In London’s case, Google’s Campus gives a far better indicator of what tech hubs and industrial clusters can add to an economy – £34m raised from investors in the 12 months to October 2013, 576 jobs created and 22,000 members of its coworking space.

Google’s statistics raise an interesting point about the different objectives for the stakeholders in incubators and hubs; entrepreneurs want money or glory, investors want returns, corporate backers want intellectual property or marketing kudos, governments want jobs and politicians want photo opportunities with happy constituents.

These different objectives means there are different measures for success and one group’s success might mean bitter disappointment for some of the others.

What the various partners define as success is something anyone involved in an incubator or hub should consider before becoming involved, in that respect it’s like a business or a marriage.

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